William J. Blake: An American Looks at Karl Marx
The average rate of profits is not a fixed rate. For Marxian theory the development of capitalism itself—from small to large, from diffused to concentrated, from distributed to centralized, from limited to universal markets—presents for each stage a different setting for the play of profits. But above all, it is the change in the organic composition of capital that affects its profits. The larger the constant capital the deeper the threat to the rate of profit. The development of capitalism implies the increasing ratio of constant capital to total capital. We are speaking here of the totality of capital, not of individual producers. If in the total social capital the ratio rises of constant to variable capital, then the rate of profit is adversely influenced.
We have seen that in order to obtain relative surplus-value each competitor sought to cut the prices of his products, by intensifying labor, and so to reduce social value, and yet, by means of his advantage, to increase the mass of surplus-value. We now see the same situation mirrored large.
Since the quantity of surplus-value is increased by the number of workers and the length and intensity of their work, if this is accompanied by a gain in the ratio of constant capital to their wages, it may show a rise in the mass of surplus-value (and so of profits) and yet be the result of a decline in the rate of profit.
We have seen that if the social capital of the United States is 200 billion dollars, and 160 billions are constant capital and 40 billions are in wages, the rate of surplus-value being 50 per cent, the profits of capital are 20 billions, or 10 per cent on combined constant and variable capital. Should the capital grow to 240 billions, 200 constant and 40 still variable, and the rate of surplus-value is raised to 55 per cent, the profits are 22 billions; that is, down to 9.1 per cent on total capital, but 2 billions more in money.
In the United States, the decennial average of profits in manufactures has declined from 25 per cent during the McKinley heyday to 15 per cent after the European war, and yet, despite that decline, the profits of corporations rose considerably in dollars. It may also happen—and this is the point—that it may decline both as rate and mass. This was true of 1929-33.
Larger Investments Reduce Rate of Profit
It is the need of each business to produce more profit that threatens the rate of profit for all. Each puts in as much equipment as it can and tries to have as much raw materials as possible converted by its workers into salable goods in the least possible time. To get more out of labor each competitor invests still more in plant, tools, machines, or, if he is clever enough to get more out of them by Taylor systems or Bedaux systems of efficiency, he must buy proportionately more raw material or auxiliary products to utilize in their speeded-up production.
Thus every competitor, by seeking to cut his costs per unit, brings about the tendency to a fall in the rate of profit for all, and further intensifies the dog-eat-dog competition. The recognition of this inevitable fate, if they do not bestir themselves, is the cause of their drive to exploit labor to the utmost.
For by those means the tendential fall in the rate of profit can be averted for a long time and, for short periods of boom, can even be reversed. The tendential law can never be set aside; it can be held up, it can be pushed back, but it is like the stone of Sisyphus in the Greek legend; he held it up and pushed it uphill, but it had a permanent tendency to push him down the slope. The analogy is exact.
Counter-Tendencies
If the organic composition of capital increases so that the rate of profit is diminished, then, if the labor-power purchased by variable capital can be made by intense exploitation to produce a rate of surplus-value that more than compensates that tendency, the rate of profit might actually rise.1 If, too, raw materials are cheapened, as in a crisis, then that reduces for a while the proportion of constant capital required. Also, especially in a panic, the throwing of whole factories onto the market cheapens constant capital investment, and so the rich and knowing men can increase the proportion of variable capital to this diminished constant capital investment, and yet they can begin rebuilding a good rate of surplus-value (“recovery”).
But again competition (even between monopolies, but that we can take up later) forces another attempt at increasing relative surplus-value and the constant capital investment and organic composition gains once more, and so the tendential law of a fall in the rate of profit must always recur, only more forcefully than before. More machinery must be installed, or new and costly technique introduced. The term “rationalization” of industry is another expression for this tendency, although also used incidentally for the more intense speeding-up of the workers.
From this ever increasing and ineluctable tendency, fortified by every move in capitalism, every accumulation, every merger and consolidation, certain profound contradictions arise.
This development of capitalism is not to be confused with the valid social aspects of its growth. The gains in production, the increase in equipment, are not in question. It is their deflection in the profit economy which the Marxists here analyze.
The Effect of Tendential Fall on Production and Speculation
The increase in the rate and mass of profit is the incentive of industry under capitalism. It is so much taken for granted that the favorite (and honest) objection to Socialism is that under it this incentive, which alone spurs development today, would be absent and so society would fall to pieces if it relied on co-operative adjustments and drives, instead of the personal passion for gain.
That the worker is industrious because of the dread of dismissal and the capitalist prosperous because of the incentive toward increasing lucre are the twin pillars of the temple.
Now, if the tendency is reversed, if there is an underlying bias toward a reduction of the rate of profit, what are its effects on a society which is conditioned socially for its increase? It certainly checks the formation of new capitals. It threatens the growth of capitalist production by its very excess of productive equipment. It brings about overproduction in the endeavor of each capitalist to increase his means of profit by selling as much as he can. It promotes speculation, for as profits become more difficult to make in industry, the deflected money and passion for gain must take another outlet. Since the money cannot be made out of labor, the capitalists strive to outguess each other on the stock exchange and in real estate and in commodity futures. They try to plunder each other, for that is all there is left to do. The frequency of crises is greater, their depth is greater, surplus capital abounds, surplus workers are enormous, until a painful rectification occurs, but one still more unstable, at base.
Since the tendential fall in the rate of profit does not diminish the rate of exploitation of workers, nor necessarily diminish the number exploited (it may, but it does not always succeed in doing so), capital seeks to counter that tendency by employing cheaper labor in the noncapitalist lands, or in backward areas; it is thus able to increase the rate and mass of profits for several years at a time.
Monopoly Control Cannot Defeat the Tendency
The immense centralization of capital in key industries leads to attempts to counter this nefarious tendency of competition by suppressing competition itself and by imposing prices that, if obtained, would enable the large companies to obtain the same rate of profit. But to the extent that they succeed (and they do partially), they close the market for their competitors, and so the social tendency to the fall of the rate of profit (that is for all capital, small and large) is not decreased but accelerated.
The tendential fall in the rate of profit is the consequence of the hunt for relative surplus-value, which led to large constant capital investments and their growing ratios to wages; this in turn led to concentration; that to centralization; what wonder, then, if the ultimate tendency of the larger capitalists is wholly to destroy competition so as to turn back the rock of Sisyphus, the laws of competition, from which their difficulties arose?
They seek to escape from this difficulty at home, by investing their capital in lands (or in backward areas of their own country), where the need to exploit labor with large capital investments in machinery is not yet pressing, for labor is too cheap to be worth superseding at great expense. These natives work for less, for longer hours and more intensively (and also bring in their families); in those countries where a higher rate of profit prevails, a larger mass of profit occurs as well as a higher rate of interest reflecting the scarcity of capital, and where new consumption markets are opened up by this development.
After a time (according to Lenin, since 1890), the principal reliance of monopoly capitalists for countering the fall in the rate of profit is to invest abroad, in the noncapitalist world, rather than in it.
But the same monopolistic power enables them, at home, to dictate onerous conditions to those who supply them with means of production (thus reducing suppliers’ profits), and to attack labor. As we shall see in the chapter on Imperialism, monopoly does not escape from the tendency of the rate of profits to fall, it deepens it.
The Marxian theory thus holds that the restrictions to increased activity, which are unthinkable in view of the physical development of the productive apparatus, are caused by their capitalist utilization. The barrier to capitalist production now becomes capital itself. That is what Marx means by his metaphor that capital becomes, in its latter developments, a fetter on production.
Mechanism of Lessening Rate of Profit
The mechanism is as follows: The higher the rate of profit, the less the part of the product at the disposal of the masses that produce value. The social production is based on low consumptive possibilities by the majority of buyers, that is, by workers or their dependents.
The commodities produced are not as salable and large sections of them, since they cannot be sold, fail to realize their surplus-value money. Capital, resting on the expropriation or even the pauperism of large masses or, at any rate, facing a deficient buying power of most workers, through its constant need for expansion, is driven to augment its productive forces irrespective of the narrow basis of demand for its products.
The tendency toward unlimited expansion (this expresses a tendency never completed) of production, or rather of productive forces, is constantly hampered by the self-expansion of the capital which is already there. For that must be achieved before the new capital can enter the field, before it can supersede it.
If the new productive tendencies or forces grow, they often destroy the older capital which had been seeking expansion. The realization of this tendency, the collision of older and new capital, the tendential fall of the rate of profit, the narrow basis of consumption for products, is already commented on by the classical economists.
To account for this they formulated the celebrated law of diminishing returns, thus putting onto nature what the Marxists attribute to capitalist limitations of innate laws of development, which thus come in conflict with those limitations.
When the rate of profit is practically extinguished, as in Germany in 1932, with no hope for its revival by its own available economic mechanisms, the regimentation of the workers ensues and production is directed toward neither consumption goods nor production goods, but to armaments. But according to the Marxians, however plausible this stop-gap, it must recreate the difficulties of the tendential decline in an infinitely more aggravated form.
1. It must be recalled that since all capitalists seek to decrease the value of their products, the producer of means of production is reducing prices to the capitalists who buy from him, and so the increase in value of constant capital is offset to the extent of that cheapening. This is true of every stage of production, as to the means of production it provides for the next stage.